Michigan's Construction Lien Act: (Part 4)

This segment represents the final segment in a four part series analyzing the Michigan Construction Lien Act (CLA). I hope you find this compilation helpful.

Our original cast of characters:

Owner: Hercules
Contractor: Musclehead Building Corporation (Musclehead)
Subcontractor: Fritz Concrete Company (Fritz)
Insane Author: Dave Phillips of Lonely Boy, LLC

In review:

Part 1 concerned the Notice of Commencement (NOC). The NOC is typically posted on the property. It must also be recorded in a commercial context. Residential NOC's may be recorded, but is not required by statute. The NOC is just as its name implies. It is a notice to relevant parties that work is about to commence. If you are an interested party, the NOC contains relevant information, the most important being the listing of the designee.

Part 2 concerned the Notice of Furnishing (NOF). A subcontractor or supplier who contracts to provide an improvement to real property shall provide a NOF to the designee and the general contractor, if any, as named in the NOC within 20 days after furnishing the first labor or material. The NOF is how the owner learns of the presence of the subcontractor. A NOF must be filed before a lien will be effectual.

Part 3 concerned the Sworn Statement and Waiver (sworn statements and waivers). A sworn statement issued by a contractor will list all parties under contract with the contractor that are still owed money. Based upon this statement, the owner or other interested parties may obtain the proper waivers. The sworn statement must be furnished before money can be collected, or a complaint filed, in an attempt to enforce a lien filed pursuant thereto.

The Lien:

Musclehead has completed its work. It requests final payment and submits its sworn statement to Hercules. Unfortunately, Hercules is not in a position to make final payment. Evidently he lost a "quarter bounce" competition at the local Mr. B's in Royal Oak. This resulted in substantial loss of money and a loss of his lunch in the process.

Anyhow, Musclehead decides to file its lien in an attempt to protect its financial position. What are the criteria for filing?

(We start in MCL 570.1111)

(1) Notwithstanding section 109, the right of a contractor, subcontractor, laborer, or supplier to a construction lien created by this act shall cease to exist unless, within 90 days after the lien claimant's last furnishing of labor or material for the improvement, pursuant to the lien claimant's contract, a claim of lien is recorded in the office of the register of deeds for each county where the real property to which the improvement was made is located. A claim of lien shall be valid only as to the real property described in the claim of lien and located within the county where the claim of lien has been recorded.

(5) Each contractor, subcontractor, supplier, laborer, or agent of a group of laborers authorized under subsection (6) recording a claim of lien, within 15 days after the date of the recording, shall serve on the designee personally or by certified mail, return receipt requested, at the address shown on the notice of commencement, a copy of the claim of lien and a copy of any proof of service recorded in connection with the claim of lien. If a designee has not been named in the notice of commencement, or if the designee has died, service shall be made upon the owner or lessee named in the notice of commencement. If the service is made by certified mail, service is complete upon mailing. Proof of making the service shall be attached to any complaint, cross-claim, or counterclaim filed to enforce a construction lien.

The heart of Section 1 is that the lien claimant's right to a construction lien shall cease to exists unless it records its lien within 90 days after completing the work.

The heart of Section 5 is that the lien claimant must serve upon the designee or owner, a copy of the recorded lien, within 15 days of its recording. Proof of service must be attached to a complaint to foreclose. You see, serving the designee or owner with a copy of the lien is a condition precedent to lien foreclosure.

(We move to MCL 570.1116)

(1) The claim of lien of a contractor, subcontractor, supplier, or laborer may at any time be vacated and discharged if a bond, with the lien claimant as obligee, is filed with the county clerk for the county in which the property covered by the lien is located and a copy is given to the obligee lien claimant.

If a bond is properly positioned, there is no need for a lien. The clerk will notify the lien holder that a bond has been filed. The lien claimant has 10 days to object to the validity of the bond. If no objection is received, the clerk will record a certificate that a good and sufficient bond has been filed in accordance with the CLA. Once recorded, this acts to discharge the relevant lien.

(We move to MCL 570.1117)

(1) Proceedings for the enforcement of a construction lien and the foreclosure of any interests subject to the construction lien shall not be brought later than 1 year after the date the claim of lien was recorded.

(2) At the time of commencing an action for the enforcement of a construction lien through foreclosure, the plaintiff shall record a notice of lis pendens with respect to the action in the office of the register of deeds for the county in which the real property involved in the action is located.

I want to draw your attention to a point of detail. Section 1 tells us that proceedings to enforce the lien must be brought within one year of its recording. Section 2 tells us that a lis pendens must be filed concerning such actions. Many people, in reading these two sections, consider a lien as having expired after the one year period, unless a lis pendens is filed within this one year period. However, let me use an example to show how this assumption may be false:

Lien recorded January 1, 2010. A complaint to foreclose is filed December 15, 2010. But the lis pendens is not of record until January 20, 2011, after the one year period. Although there is no record activity within the one year frame, both segments of the statute have been satisfied. Action was commenced within the one year frame and a notice of lis pendens was recorded concerning the cause of action. Sneaky, but true.

(We move to 570.1119)

(3) A construction lien arising under this act shall take priority over all other interests, liens, or encumbrances which may attach to the building, structure, or improvement, or upon the real property on which the building, structure, or improvement is erected when the other interests, liens, or encumbrances are recorded subsequent to the first actual physical improvement.

(4) A mortgage, lien, encumbrance, or other interest recorded before the first actual physical improvement to real property shall have priority over a construction lien arising under this act. The priority of the mortgage shall exist as to all obligations secured by the mortgage except for indebtedness arising out of advances made subsequent to the first actual physical improvement. An advance made pursuant to the mortgage, but subsequent to the first actual physical improvement shall have priority over a construction lien if, for that advance, the mortgagee has received a contractor's sworn statement as provided in section 110, has made disbursements pursuant to the contractor's sworn statement, and has received waivers of lien from the contractor and all subcontractors, laborers, and suppliers who have provided notices of furnishing.

These two sections concern the doctrine of "relation back." It's a clever and sneaky little warrior that can catch many by surprise. In the context of the CLA, let me use an example to show how relation back works:

May 1, 2010, Musclehead begins work on Lot 1 of Phillips Subdivision.

June 1, 2010, Rocket Man Mortgage Company records its mortgage as to Lot 1.

September 1, 2010, Musclehead records its lien at the Oakland County ROD.

Relation Back: Although Rocket Man has recorded its mortgage prior to Musclehead's lien, Musclehead's lien will relate back to May 1, 2010, the first date of improvement, in establishing priority. Musclehead wins. This is exactly why a recorded Notice of Commencement must be reported. In essence, the NOC is a warning bell to a subsequent lienholder that the doctrine of relation back may be looming. Just my opinion.

I apologize for the lengthy writing, but please hang on; we're almost there.

(We move to 570.1128), the final section:

If any statement or claim of lien has been recorded in the office of a register of deeds, and the time within which proceedings to enforce the lien through foreclosure has elapsed without commencement of the proceedings, a person with an interest in the real property affected by the lien, or that person's agent or attorney, may make and present to the county clerk of the county in which the statement or claim of lien was recorded, an affidavit showing the time when the statement or claim of lien was recorded and the names of the parties to the statement or claim of lien. The county clerk shall examine the records of his or her office, and if it appears that proceedings to enforce the lien have not been commenced with the time provided by law, the county clerk shall execute and deliver to the owner a certificate of that fact, bearing the seal of the circuit court. The certificate may be recorded in the office of the register of deeds for the county where the statement or claim of lien was recorded, after which the statement or claim of lien shall have no effect.

This section simply cleans up the loose ends regarding attempted enforcement of a lien. It clears up all the issues I discussed concerning 570.1117. The certificate allows parties to move forward without the cloud of potential litigation.

Summary:

This concludes my overview of the CLA. I extracted portions of the CLA that I feel are relevant to most practitioners, excluding attorneys. Attorneys dealing with the CLA on a day to day basis have much more knowledge than I have. Therefore, this compilation is not designed to address the practice of law in this area.

The world of the CLA encompasses the Notice of Commencement, the Notice of Furnishing; the Sworn Statement; the Waiver; the recording of Lien; and the Lis Pendens. After an action to enforce a lien is filed, it becomes the issue of the Circuit Court. The CLA only functions to establish a valid lien. If the requirements of the CLA are not satisfied, there is no lien on which to collect or foreclose.

Post lien filing, the CLA establishes a one year expiration of the lien when no action to enforce has been commenced. The CLA also allows for the issuance of a certificate designed to properly end the life of the lien.

Thanks for reading, and please view my blog as often as possible. I have a lot of new ideas, such as audio recordings and numerous other topics. This might just be ready to explode.

dave